Article: Check Your Premises: Dodd-Frank and Community Banking

Check your premises. Going on nearly two decades as a software engineer, those three simple words have operated as a mantra for me countless times when troubleshooting complex systems. From double-checking that the computer is actually plugged in, all the way to reviewing the most arcane configuration settings, I can't tell you how many instances pausing, taking a deep breath, and challenging my assumptions have saved me a lot of trouble and time. It is a shame the political and pundit classes can't do the same when examining our economy and its woes.

Part of our economic problems today lies with the mistaken assumption that tax and regulatory policies that benefit the "too big to fail" banks are really helping the "real economy," or that the profitability of a narrow set of Dow Jones components is representative of the economy in general.

Don't get me wrong, profits are very important. For moral reasons, those who labor, innovate, and create jobs deserve to be paid. For pragmatic reasons, profits act as price signals in a market economy, giving hints to producers as to where to allocate labor and capital. Profits give us the means to save for old age. They provide for us when we are sick. And, probably most importantly, they let us enjoy ourselves on those days of our lives when we are not on the clock.

When looking at the Dow's recent all time highs, a quick check of premises leads one to ponder the paradoxical all-time high of 46 million people on food stamps and household incomes stagnating at levels last seen ten years ago.

Somewhere along the way, when juicing this or that Wall Street index with cheap credit came to be the primary tool of economic planners, we lost sight of the other side of the equation -- good ol' fashioned jobs.

Over the course of a generation, whether by accident or as a result of the captured regulatory process itself, we have seen an unprecedented consolidation of banking interests in this nation which, not so coincidentally, mirrors the consolidation of economic and political power into a smaller and smaller set of irresponsible, unresponsive, and unstable hands. This consolidation has often come at the expense of those who help fund Main Street's entrepreneurial efforts -- community banks.

The latest assault on aspiring job creators, and the network of capital required to support Main Street's business plans, is the well-intentioned Dodd-Frank Wall Street Reform and Consumer Protection Act. Passed hastily in July, 2010, packaged as the biggest overhaul of the financial system since the Great Depression, and designed to rein in the corrupt practices of the barely-solvent and over-leveraged financial sector that brought the world to the brink of financial catastrophe in 2008, the legislation has in fact failed on several fronts.

Just when small sized businesses need investment capital the most in order to expand inventory, hire workers, and make investments in plants and machinery, a certain sort of bait-and-switch has occurred. Dodd-Frank has gone from supposedly being the panacea to inoculate the economy from the lawless nature of the too big to fail banks, to endangering a class of community banks that may prove too small to survive.

Despite the stated purpose of Dodd-Frank being to reform the highly-leveraged risk takers of Wall Street, it seems all too often the hammer and weight of regulatory compliance is falling on Main Street's community banks. Originally, most observers of reform generally assumed the increased regulatory burdens would fall on larger banks. Unfortunately, the observers were wrong.

The increased regulatory costs are easily absorbed by the big players in the market who consider them a small cost of doing business. But for your local community bank who may provide lines of credit for the local coffee shop, car dealership, or contracting business, the increased regulatory compliance costs can be the make or break difference between profitability or having to shut down.

In the wake of crisis, people will always look to their leaders, particularly those uttering the words "reform". It is a natural human reaction, when one's well-being and future is potentially negatively impacted or put at risk, to put faith in people in positions of power or authority who confidently claim to understand both the genesis of a crisis and the salve that will ensure it will not return. It is in those very moments of panic when a quick premise check is due. Whether a software code delivery is at risk, or your retirement, sometimes it really pays to ensure everything really is as it appears before proceeding. And, after taking that breath, sometimes you just have to suck it up, accept that it is going to be a late night, and decide an uninstall and a reboot is really the best course of action.